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More than half of production is still cash negative after including sustaining capex, and the current price environment does not support the reopening of operations that were placed on care and maintenance last year (..

24 Apr 2013

LONDON (Commodity Online): Global platinum market may deliver a deficit of 248koz this year, compared to 461koz last year. The deficit is also expected to touch 317koz in 2014, stated London based Barclays in its recent market analysis.

“Despite the weak demand backdrop, we expect supply to under perform, keeping the market in deficit. We forecast overall supply to fall by 3% y/y from a weak base year and global demand to fall by 5.4% y/y,” the bank added.

The key upside potential for prices continues to stem from the mine supply profile, where an escalation of labour disruptions in H2 12 highlighted the fragility of the market and the difficult challenges that lie ahead.

Excluding mine supply, Barclays forecast platinum auto catalyst recycling to grow in excess of 10% y/y in 2013 following a 15.5% y/y decline last year as spent canisters were held back in light of a low-price environment.

On the mining side, the PGM basket price rose to just over ZAR10,000 in Q1 13, compared with the average PGM basket price last year of just under ZAR10,000.

The PGM basket dipped as low as ZAR8961 in 2012 having tested highs of ZAR12,033, with the intra-year lows matching the average cost of producing the PGM basket, excluding sustaining capex.

More than half of production is still cash negative after including sustaining capex, and the current price environment does not support the reopening of operations that were placed on care and maintenance last year (approximately 300koz are still cash negative). Of course, the PGM basket price needs to move higher on a sustained basis for mines to be reactivated, and prices have not retained their recent gains.

As such, this supply is not going to be brought back online soon, and after factoring in the ramp-up period, next year is most likely the earliest, in Barclays view. Outside of reactivations, the most notable new project due to come online is Northam Platinum’s Booysendal, which is to start production this year and ramp up to just under 100koz pa of platinum, although the power supply still needs to be secured.

Outside of South Africa, Vale could increase platinum output by just over 30koz in H2 13 as its Totten project ramps up in Canada; however, volumes overall are modest.

Given that cost pressures are mounting rather than easing in light of biennial wage negotiations, combined with rising power tariffs as well as the increasing cost of consumables, reactivations look unlikely in the near term, with the PGM basket too low to encourage additional developments, according to Barclays view.

The key area of weakness in H1 13 stems from the demand side, with continued weakness posing downside risk to Barclays price forecast and the platinum balance.

“Our auto analysts look for European auto production to fall by 6.4% this year, following a drop of 4.4% last year, and to return to modest growth of 2% annually over the next five years. EU car registrations have kicked off 2013 on a weak note, declining by 13% y/y in January and extending that weakness into February with a decline of 12% y/y,” noted Barclays.

Platinum demand in Europe had previously benefited from production growth, further supported by the growing diesel market share. However, diesel’s share of the market looks set to be challenged in light of Euro VI emissions standards raising costs but overall the implementation of tighter legislation should still be supportive for demand. In terms of non-industrial demand, investor interest scaled record highs in Q1 13, bringing the risk of profit-taking. Although this threat has now eased, positioning remains elevated.

Given Barclays expectation for demand to improve in H2 13, combined with the risk of heightened supply disruptions due to biennial wage negotiations as the AMCU has gained a greater share of worker representation, the bank believes prices are likely to gain traction in H2 13 and a tighter market balance is likely to support firmer prices into 2014.

In turn, Barclays expects platinum to regain its price premium over gold as an improving macro backdrop weighs upon gold but supports platinum demand.


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